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Part I: Off-lease volumes, STRATIM purchase open doors for KAR

Rendering of the courtyard at KAR Auction Services headquarters. Photo courtesy of KAR.

Monday, Feb. 26, 2018, 02:09 PM

By Joe OverbySenior Editor

CARY, N.C. -

If you consider how the continuous wave of off-lease volume impacts a company as wide-ranging as KAR Auction Services, the most obvious place to start is probably its ADESA business unit.

After all, the cars coming off lease not only boost the volumes for the auto auction company, but also affect what the mix of vehicle consignment looks like in the lanes and online.

But with KAR’s model being that of an end-to-end solutions provider in the overall wholesale car space, the implications and opportunities from off-lease cars are as diverse as the KAR business units themselves.

Chief executive officer Jim Hallett and chief financial officer Eric Loughmiller addressed that and more with AuSM by phone last week, shortly after the company conducted its fourth-quarter and full-year 2017 earnings call.

It was a year where KAR generated total operating revenues of $3.46 billion, up from $3.15 billion in 2016, and posted operating profit of $566 million (up from $499 million).

Net income rose from $222.4 million to $362 million.

ADESA vehicle volumes rise

In its latest earnings slides, KAR says off-lease supply has boosted both volumes and physical auction fees for the ADESA business unit. There were 3.18 million vehicles sold through ADESA last year, which was up 10 percent year-over-year (up 5 percent excluding acquisitions), and dealer consignment share at ADESA’s physical auction fell from 48 percent to 45 percent, as the gains in off-lease were “displacing” these units.

(It’s also important to note that the number of vehicles sold at ADESA physical auctions was up 5 percent with acquisitions, but down 2 percent when they were not included. Online-only volume climbed 26 percent overall, and it was up 24 percent when excluding acquisitions.)

And the industry at large is likely to get between 300,000 to 400,000 more of these cars than they did in 2017, Hallett said during the earnings call, according to a transcript of the call provided by FactSet CallStreet on the KAR website.

“And if you think about that just for a moment, many of these off-lease vehicles are going to sell in our private label upstream programs,” Hallett said in the earnings call. “They’re also a higher-dollar car. Last year, we averaged a little over $17,000 a car. This year, we may be pushing close to $18,000 a car. So, that doesn’t hurt.”

‘More and more data … make better decisions’

It also doesn’t hurt that many of the KAR business units beyond ADESA are positively impacted by more off-lease cars.

Asked how the KAR entities are helping customers handle this surge of off-lease units, Hallett told AuSM: “I think the biggest thing that we’re doing is we’re providing them with more and more data, more information to help them make better decisions.”

For instance, consider last year’s acquisition of DRIVIN, which has already begun pilots with various automakers. Through predictive pricing and analytics, cars are being priced without human involvement, Hallett said. It’s all based on pricing models that the company has built.

So that helps consignors on the seller’s side.

From the buyer’s standpoint, Hallett said, KAR aims to give them as much information into price discovery as possible.

Through AutoNiq, for instance, buyers can scan a VIN to “aggregate” the info from various pricing guides and gauge what that car’s market value would be on a given day.

Increased off-lease volume also provides opportunities for KAR to conduct post-sale reconditioning for dealers if needed, real-time shipping through the CarsArrive platform.

And then you have the sale itself, of which KAR gets a trifecta of opportunities.

“Not only we are going to get a high share in the closed private label, but then we’ve put more of a focus on our open sale. And this year, we actually get a third lick of the lollipop, because now, we can also sell some of those vehicles on TradeRev,” Hallett said during the earnings call.

In the call with AuSM, he would add: “The car can go into a closed environment, move to an open environment and then move to TradeRev. So we’ve got three exclusive opportunities to sell that car before it goes to a physical auction.”